SLCG Releases "Structured Products and the Mischief of Self Indexing"

WASHINGTON, Oct. 21, 2016 /PRNewswire/ -- Securities Litigation and Consulting Group, Inc. ("SLCG") today released a study of the increasing use of indexes created by brokerage firms to determine payoffs to structured products.  The report's primary authors are Craig McCann, Mike Yan and Geng Deng.  Dr. McCann and Dr. Yan are Principals at SLCG. Dr. Deng formerly of SLCG is currently a Vice President at Wells Fargo.

The SLCG report traces the evolution of structured products from their origin as a source of financing for operating companies in the 1980s to a source of riskless profits for brokerage firms. Brokerage firms now issue structured products linked to indexes they create rather than linked to independent indexes from Standard & Poor's. SLCG illustrates the potential conflicts of interest created by proprietary volatility indexes although the conflicts are present in other proprietary index based investments as well.

Dr. Yan explains that brokerage firms like UBS, Bank of America and JP Morgan have incentives to shave the returns on their indexes so that payments these firms make under the structured products they issued at maturity are reduced. He says recent SEC settlements with UBS over its V10 Currency Index and with Bank of America over its VOL Index reflect awareness of the harm caused to investors by self-indexing.

Dr. McCann points out that UBS and Bank of America were not the only firms that built phantom "trading costs" into their indexes – trading costs not built into the Standard and Poor's indexes other brokerage firms use to determine their structured products' payoffs. He says that JP Morgan's Strat VOL related structured products is another example of the spurious complexity firms build into these indexes making regulatory oversight more difficult and allowing issuers to deceptively sell structured products.

This study and other working papers are available at slcg.com/securities-research.php

Securities Litigation and Consulting Group, Inc. ("SLCG") is a financial economics consulting firm based in the Virginia suburbs of Washington, DC. SLCG provides consulting services and expert witnesses to law firms, corporations, individuals and state and federal agencies involved in complex litigation throughout the United States.

For further information about SLCG or its research, please contact Dr. McCann at 703-246-9381 or [email protected], Dr. Qin at 703-539-6778 or [email protected] and Dr. Yan at 703-539-6770 or [email protected] or visit us at www.slcg.com.

SOURCE Securities Litigation and Consulting Group, Inc.

Related Links

http://www.slcg.com